Support & Resistance Lines
Fundamentally to be able to trade you need to be capable of describing what the price activity is doing on a chart. When you look at the chart, you are in the process of identifying and describing where the price is and what it is doing. A common and basic tool is resistance and support lines. The resistance and support lines prove where the emotions of the market are clustered.
Support is where the price stops falling and comes to a temporary rest. We call this area support. The price has for the time being stopped falling and is now resting on the floor so to speak.
Resistance is where the price stops rising and takes a break. The movement has at least temporarily hit a ceiling you can say.
Drawing the Lines
When drawing a resistance or support line you need to find out the following: Where is the most recent low? Where is the most recent high? From there you simply draw a horizontal line under the low and the one more above the high. It is common you need to wait a bit to see if these lines are taking form. You need to verify that there is a zone of support, which typically means waiting to see three failed attempts to break support or resistance.
First Trading Strategy
You are now ready to develop your first trading strategy. If you wish to buy in the market, one of the best locations to buy will be near a support area. On the contrary if you wish to sell into the market, one of the best locations to sell will be near a resistance area. It is quite simple why that is. The strong support makes it likely that a low in the price has established and if a strong resistance has been established it is likely a high has been established. Trading near support and resistance helps achieve the goal of buying low and selling high. A cliché nonetheless a solid business plan that always will be profitable.
You may be thinking this sounds too simple and how can it be? Well, in reality the lines break through often and you will soon realize this and you need to be able to incorporate this in your strategy. When a line is broken, it changes character. The support line begins to act as a new resistance line. The resistance line begins to act as a new support line depending on which line that breaks through.
It is evident that you try to determine how strong the support and resistance lines are. The stronger they are the greater the confidence the trader has in applying these lines to shape a trade.
Identifying the Degree of Weakness or Strength
The more frequent these lines have been touched without breaking, the stronger indication it is to the trader. We tend to say three touches confirm a good possible entry point. The longer the time-frame, the better indicator this is. When you get more advanced, you will need to consider the price action in relation to other patterns such as Bollinger Bands and the presence or absence of doji candles.